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EGB/Gilt: UK Inflation Risks Drive Gilt Underperformance

BONDS

European sovereign bonds have continued to sell off today with gilts leading the charge. Equities are also pushing lower alongside gains for the dollar against G10 FX.

  • UK inflation risk remains firmly in the spotlight, with gilts underperforming EGBs by a wide margin. Cash yields are up 9-13bp on the day with the curve bear steepening.
  • The ECB's Nagel stated that there is a risk of high inflation persisting for even longer which requires urgent action next week. He further argued in favour of a 'strong' rate hike in September.
  • Eurozone inflation edged up to 9.1% Y/Y in August, marginally above the consensus estimate of 9.0% Y/Y.
  • Bunds initially opened firmer before selling off through the morning with yields now up 3-5bp.
  • It is a similar story for OATs with yields broadly up 1-4bp across much of the curve.
  • BTPs have underperformed core EGBs with yields up 6-10bp and the long end of the curve bear flattening.
  • Germany has launched a 1.30% Oct-27 Green Bobl, with the target size set at EUR5bn and books closing above EUR14bn.
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